Gaum v. Grant Thornton Limited, 2023 NSCA 5

February 08, 2023

Can a creditor apply to have the court declare a proposal to have been refused after the meeting of creditors?

On July 16, 2018, Gaum filed a Proposal pursuant to Part III, Division I of the Bankruptcy and Insolvency Act.  The Trustee in bankruptcy recommended the unsecured creditors vote in favour of the Proposal.

For a Proposal to pass it must be accepted by a majority in number representing two-thirds in dollar value of the unsecured creditors who vote pursuant to s. 54(2)(d) of the BIA. The Trustee approved claims from the Canada Revenue Agency, Canadian Imperial Bank of Commerce, and Zion II Inc (“Zion”) in the respective amounts of $708,491.97, $23,886.33, and $2,091,801.18. Kadray claimed he was owed $406,971.37 by Gaum, but the Trustee only allowed his claim in the amount of $1.00, which allowed him to vote on the Proposal.

On May 7, 2019, a meeting of creditors was held. The CRA and Kadrav opposed the Proposal, while CIBC and Zion voted in favour of it. The Proposal was deemed to be rejected because it had not been approved by a majority of creditors in number. Gaum appealed the Trustee’s decision to allow Kadray’s claim in the amount of $1.00 to the Nova Scotia Supreme Court.  He requested his Appeal be allowed and his deemed assignment into bankruptcy under s. 57 of the BIA be set aside upon recalculation of the creditors’ votes.  The result would be that the Proposal would be accepted.

On June 2, 2021, Zion filed an affidavit confirming it no longer supported the Proposal. In light of Zion’s change of position, the Trustee moved for an order for directions pursuant to s. 34, asking whether a creditor can make application pursuant to section 50(12) of the BIA to have the Court declare the Proposal to be deemed to have been refused by the creditors. Section 50(12) provides that prior to the meeting of creditors, a trustee, receiver, or creditor may make an application to declare a Proposal to have been refused. Section 50(12) does not allow for an application by a trustee, receiver or creditor after the meeting of creditors.

The motion judge found that there was a legislative gap in s. 50(12) of the BIA and the gap should be filled to allow a trustee, receiver, or creditor—after the meeting of creditors—to apply to the court for an order deeming the proposal to have been refused by the creditors. As a result of his determination that such an application could be made, the motion judge dismissed Gaum’s Appeal of the Trustee’s decision to allow Kadray’s claim. Gaum appealed to the Court of Appeal.

The Court of Appeal held that there is no gap in the legislation as s. 50(12) is limited in time to “any time before the meeting of creditors”. The wording permits no interpretation other than the requirement that the application to the court must be made prior to the meeting of creditors. In fact, the process is quite straightforward. Prior to the meeting of creditors, the trustee, receiver, or any creditor may make an application to declare that the Proposal is deemed to have been refused if it is not likely to be accepted by the creditors. If successful, it is the end of the matter and there is a deemed assignment into bankruptcy. If there is no such application or the application is unsuccessful, the Proposal goes to a meeting of creditors, there is a vote, and if the creditors—a majority in number representing two-thirds of the dollar value of the creditors—vote in favour of the Proposal, the trustee applies to the court seeking “approval” of same. If the creditors vote against the Proposal, there is a deemed bankruptcy.

If a creditor changes their mind between the time of the vote and the time of the application for court approval, either for or against the Proposal, it may make its position known to the court at that stage. The court then decides whether to approve the Proposal.  If it does not approve it, there is a deemed assignment into bankruptcy.  If it does, then the trustee implements the Proposal.

Even if there was a legislative gap, no creditor or the Trustee had made an application to the court to deem the Proposal to be refused prior to the May 7, 2019 meeting of creditors. A trustee or a creditor may not, at any time after the meeting of the creditors where a Proposal has been approved, make an application to have the Proposal to be deemed to be refused by the creditors because a creditor has changed its mind. The BIA simply does not allow that to occur. The motion judge was in error in so finding. Accordingly, the Court of Appeal allowed the appeal.

Judges: Farrar, Bryson and Bourgeois JJ.A.

Counsel: John O’Neill for the appellant; Tim Hill, K.C. of BoyneClarke for the respondent; and Robert MacKeigan, K.C. and Sara Scott of Stewart McKelvey for the intervenor

By Matilda Lici